A Healthy Investment Idea

I've written columns recently focusing on consumer discretionaries, which haven't been as bad as other sectors amid market weakness. Another less-bad sector has been health care, with a year-to-date gain of 13.8%.

A top price gainer in the sector backed by good earnings performance is Gilead Sciences (GILD), up nearly 13% so far this month. The bulk of the gains came on Nov. 12, when the stock gapped up on news that a combination of three drugs had a 100% success rate in treating 25 patients with the hepatitis C virus. Earnings performance has been on the decline recently, though revenue has grown at double-digit rates in each of the past four quarters. Analysts expect 2012 to wrap up with earnings per share of $3.85, which would be down a penny from 2011. In 2013, earnings are expected to rise 14%, to $4.39 per share. A glance at a weekly chart immediately shows you that Gilead tends to have a wide-and-loose trading character, making it more challenging and potentially frustrating than many large caps.

Over the past year, the stock has repeatedly cleared consolidations, only to retreat once more before rallying again. After its recent gap higher, the stock is a bit frothy, so investors may want to wait for the next moving-average pullback. It's currently working on its sixth straight month of upside trade, another piece of evidence in favor of waiting before making a purchase.

Mylan (MYL) is on the smaller side of large-caps, with a market cap of just over $10 billion. This is another strong sector gainer, and has been trending above its 10-week average since late October. On Tuesday, the stock bucked the market downtrend, gaining 0.3%, to $26.03. The move followed news that Standard & Poor's boosted Mylan's rating to "BBB-" from "BB+" on a reduction in leverage over the past couple of years. Mylan, best known as a generic drug maker, also does a strong business in its EpiPen Auto-Injector, used to treat allergic conditions, including anaphylaxis. Analysts see the company earning $2.58 per share this year, up 26% from 2011. The stock rallied to a 52-week high of $26.55 last week. It pulled back in an orderly fashion, getting support at its 15-day average.

Fellow generic drug maker Watson Pharmaceuticals (WPI), which will change its name to Actavis next year in recognition of the widely recognized brand it recently acquired, is up 41% year-to-date. Like Mylan, this stock sits right on the edge between being a mid-cap and a large cap, with a market capitalization slightly north of $10 billion. Earlier this month, Watson received regulatory approval to sell a generic version of Pfizer's (PFE) Revatio. The drug treats pulmonary arterial hypertension, or high blood pressure in lung arteries. Analysts see Watson growing earnings by 24% this year, to $5.92 per share. That's expected to increase another 39% in 2013, to $8.24 per share, boosted significantly by the Actavis revenue.

The stock rallied to an all-time high of $90 on Nov. 1, but headed lower after that, essentially in tandem with the benchmark index. Early in Friday's session, the stock was trading slightly lower, and had slipped slightly below its 50-day moving average. The pullback could potentially offer an entry opportunity.

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